Supreme Industries - Hidden Value

Supreme Industries has strong earnings and also real-estate assets to encash

Even in a market that is supposed to be overvalued, there are smaller stocks that are undervalued for their level of growth. Supreme Industries is one such stock. Supreme operates in four segments—plastic pipes, packaging, industrial and consumer products. Its pipes are used for irrigation, bore-wells, portable water supply, plumbing, drainage, underground sewerage, rainwater harvesting and water management. The packaging division caters to the sports industry, electronics, food and textiles.

It manufactures dashboards and other components for the automobile sector which falls under the industrial category. Tata Motors and Mahindra & Mahindra are two customers in this sector. For the consumer goods sector, it produces plastic products for LCD TVs and air-conditioners. Over a period, Supreme has managed to set up 19 plants across India. It has recently expanded the capacity at its Halol, Silvassa, Gadegaon and Pondicherry plants and has also increased the capacity of injection-moulding machines and ancillary equipment. It has started a new factory at Jamshedpur for the ‘World Truck’ project of Tata Motors. Supreme Industries has restructured its business over the past couple of years by selling off unprofitable divisions and investing in the others. It divested its PVC film business at Malanpur (Madhya Pradesh), food service-ware plant in Daman and flexible film division at Pondicherry. It has developed its land in Andheri (West) in Mumbai by constructing a 10-storey commercial complex offering 2.5 lakh square feet area for sale. However, it has been able to sell only one office block out of 18, until now. It earned Rs20.5 crore from the sale of 13,106 sq ft of premises at an average realisation of Rs15,600 per sq ft. At this rate, the total revenue is projected at Rs390 crore. In its restructuring process, it has recently shifted its manufacturing unit for protective packaging from Nandesari in Gujarat to Pune in Maharashtra which has left it with another piece of land worth Rs1.5 crore that can be sold in future.

While the pipes business is largely volume-driven, profitability comes from the industrial and consumer segments. Because of the very nature of its business of manufacturing plastic materials, the company is subject to the volatility of the plastic raw materials prices. In FY08-09, the rise in raw material prices reduced the consumption of plastic, affecting sales. With the softening of raw material prices, it has been able to increase its sales in the past two quarters. Its operating margin is 16%. Its market-cap is 0.68 and 4.11 times its sales and operating profit, respectively. Return on equity is 34%. Worth buying.

UNQUOTED

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